Rising interest rates have boosted the British pound by 2 percent against the euro in recent months. The question is whether this revival will continue.
High inflation is partly temporary. For example, the price for a barrel of Brent oil has skyrocketed by 60 percent in the past twelve months. If this increase does not continue in the coming months, the effect of higher fuel prices will gradually disappear. But that takes time.
Before that, inflation could rise even further, as Johnson revoked all Corona restriction rules last week. As many distribution chains are still under pressure due to container shortages and the aftermath of Brexit, growing economic activity could soon translate into rising prices.
A new rate hike is a stepping stone for the Bank of England to turn off the money tap in other respects.
In recent years, the bank has bought up government bonds and other assets for hundreds of billions of pounds. A first step is to stop automatically making new purchases as soon as these bonds are redeemed. Next, we can think about reducing the significantly expanded balance sheet. The big question is which parties then emerge as major buyers of British government bonds.
It is already clear that those parties want a higher interest rate than the 1.1 percent that is now paid for 10-year loans in the United Kingdom. And that higher remuneration will soon translate into heavier interest charges for the British government.
For the time being, however, foreign exchange markets have a much more eye for the upcoming rate hike than for the rising British financing costs and Johnson’s Corona parties.
